Wolseley Profit Drops 23%, Trade Gets Tougher

British building materials group Wolseley reported a 23 percent fall in first-half profit on Monday, hit by the collapsing U.S. housing market, and warned of tougher conditions, sending its shares to 5-year lows.

Wolseley, the world's biggest distributor of plumbing and heating products, earns half of its revenues in North America.

"Since our last update in January, markets have continued to weaken," Chief Executive Chip Hornsby told reporters.

"U.S. housing in particular is still declining against the backdrop of the global credit squeeze, which is affecting consumer confidence in many more markets including Europe.

The news came after a fire sale of Bear Stearns on Sunday and a Federal Reserve emergency cut of a key lending rate sparked fears that the worldwide credit crisis will claim more casualties. Global stocks sank and the dollar tumbled on Monday, after the biggest sign yet of how devastating the credit crisis is for Wall Street.

Wolseley reported trading profit of 300 million pounds ($591 million) for the six months to end-January, compared with analysts' average forecast of 307.6 million pounds, as its U.S. unit Stock swung to a loss of 44 million.

Wolseley defines trading profit as operating profit before amortisation and impairment of acquired intangibles.

It warned the U.S. housing market was likely to deteriorate further and put additional pressure on the "repair, maintenance and improvement" (RMI) market.

Its North American division includes plumbing and heating operation Ferguson and building materials unit Stock, which bore the brunt of the continued decline in new residential housing.

Wolseley said housing starts fell 25 percent during its first half to an average of 1.2 million, with the trend worsening further to 1.0 million in January.

In Europe, growth rates are also likely to slow, although the RMI and commercial industrial segments are expected to remain marginally positive, Wolseley said.

Shares in Wolseley fell 6.7 percent to a 5-year low of 496-1/4 pence a share by 0930 GMT. The shares have fallen more than 30 percent since the start of this year, hit by the U.S. slowdown and a weakening outlook for the non-residential market in the U.S. and Europe.

"Unfortunately for Wolseley the misery continues, with little sign of any respite until the U.S. housing market stabilises... There is little optimism to be gleaned from these figures," Hargreaves analyst Keith Bowman said.

"Although management have taken strong measures in order to try to limit the pain, for now it appears as though they may be attempting to swim against the tide."

Deutsche Bank analysts said 2009 consensus forecasts were likely to be cut sharply, and reduced their 2009 earnings per share forecast by 3.6 percent to 42.5 pence.

No Breach in Covenant

Wolseley, however, reassured investors that its cash flow remained strong with no breach in debt covenants and said it would cut costs further.

"The group is fully in compliance with its borrowing covenants and is confident that this will remain the case," Wolseley said, adding it had committed and undrawn banking facilities of around 1 billion pounds at end-January.

Wolseley, which slashed 10,000 jobs in the past 18 months, or more than 10 percent of its workforce, said it expected significant cost reductions in the second half, as it plans reduced capital spending and is more selective about acquisitions.

The group raised its interim dividend by 3.7 percent to 11.25 pence per share.